The voices of Tax Policy Center's researchers and staff
Senator Marco Rubio (R-FL) has offered the outlines of an ambitious plan that he says would end poverty. One creative piece: Replace the well-known and highly effective earned income tax credit (EITC) with a monthly “federal wage enhancement” for all individuals with qualifying low-wage jobs.
It is a bold idea. The EITC, along with the refundable child tax credit (CTC) lifted 10.1 million people out of poverty in 2012, including 5.3 million children. But the EITC has some major shortcomings: It does very little to help low-income workers without kids (mostly single men) and most recipients only get much-needed cash when they file their tax returns. Rubio’s plan seems aimed at addressing both issues.
An individual worker credit makes a lot of sense. Policymakers from the Bush tax reform plan to the Bipartisan Policy Center proposed expanding worker credits to include families without children. My colleagues and I at the Tax Policy Center have done a fair amount of work on this idea as well. See this and this.
Although the current childless EITC reaches some very low-income workers, the maximum benefit is less than $500, a fraction of the supplement available to families with children. The maximum EITC for families with children varies from $3,305 - $6,143 in 2014, depending on the number of children eligible for the credit. Childless families are the only households that still regularly face federal income taxes when they earn poverty- or near-poverty level wages. A credit aimed at treating individual workers on par with families with children would make the system fairer and be a huge benefit to childless workers who are struggling to make ends meet. It could even help children because it would encourage noncustodial fathers to enter or remain in the work force, which improves the odds that they make child support payments and remain connected with their kids.
In theory, a frequent wage supplement could make sense. Utilities and rent must be paid monthly, so there are advantages to a cash supplement that arrives at the same time as these recurring bills. Regular payments would also be more responsive to changes in earnings, just like the Supplemental Nutrition Assistance Program (SNAP – formerly Food Stamps) and other traditional anti-poverty programs. However, research shows that low-income families prefer to receive the EITC as a lump sum payment at the end of the year.
In addition, a monthly wage enhancement is a radical departure from current tax treatment, and Rubio’s specific plan is difficult to assess until he fills in gaps. For instance, what would happen to a worker whose income changes during the year? Would Rubio’s plan provide supplements in some months and not others – even if annual wages ended up being quite high? SNAP and TANF benefits include an asset test, so that wealthy people with no earnings in a particular month don’t qualify. The EITC is also only available to households with little or no capital income. Would employers have to administer these sorts of tests when calculating the wage enhancement? Would the wage enhancement be large enough and apply to a broad enough population that current EITC recipients wouldn’t lose out?
There is a middle-ground. A plan such as this could be phased-in. To start, expand the childless EITC so it’s on par with its more generous counterpart for families with children. Senator Rubio could even restore the ability of families to receive advanced payments for the EITC, although he'd need to figure out a way to make them desirable to low-income families.
Through those relatively modest changes, Rubio wouldn’t risk destroying a program that has been truly effective at reducing poverty – yet he could improve the tax treatment of families without children and perhaps end poverty for more people.
It is important to note that replacing the EITC is just one piece of Rubio’s much more comprehensive plan. The rest includes replacing many anti-poverty spending programs (he hasn’t said which) with a single block grant to states. That idea is enormously controversial. But his wage enhancement proposal could help advance an important conversation about the best way to supplement income for low-wage workers.
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